Musings

4 February 2013 - 13:11, by , in Musings, No comments

With the concern about inflation, TIPS (Treasury Inflation Protected Securities) seem to get a lot of attention. These are a bond where your return adjusts over time based upon the CPI rate.

At the moment they have a negative real return, i.e. if you account for inflation then these bonds have a negative rate of return… I am not sure if now is the time to be a buyer of TIPS.

Here is a chart of the real rates of return dating back to 1987.

TIPS Real Rates

People’s concern about inflation is often times driven by the ever increasing expansion of the monetary base.  However that does not always necessarily lead to inflation as measured by CPI, this is best evidenced by the ongoing drama in Japan.  Huge expansion of the monetary base and they pray for inflation, 23 years into their experiment:

photo

The last concern about TIPS and inflation, that I have, is that since the Clinton administration, the way that CPI is calculated keeps getting adjusted because of the use of hedontics – but that is a conversation for another day.  Needless to say that is the CPI measure had not been adjusted over multiple time periods then we may be experiencing an inflation rate of 4-6%, not 2-3% as most people believe.  John Williams at www.shadowstats.com, has some amazing data on that.  Here is a chart from their site:

alt-cpi-home2

 

That’s it from me and bye for now.

 

About author:
Damien is the founder and owner of Lanyon Advisory Services and has a extensive knowledge and experience in financial planning and wealth management.

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